Those Vanishing Savings: Where Did They Go?

Those Vanishing Savings: Where Did They Go?

Here's a scenario based on a real situation:

A public-sector client is seeking competitive bids for staffing solutions. In doing so, it considers its own historic rates for existing contractors, heavily weights its bid-rating system toward cost, and states that it is seeking a savings of 35 percent compared to its historic rates.

Managed Service Provider (MSP) 1 promises it can reach a savings of 15% by using a combination of carefully researched, market-based values and calling on its close relationships with staffing suppliers. MSP 2 promises to save the full 35%.

To the client, MSP 2 is the clear winner. Throughout the course of the contract, however, despite the promise made in the bid, there are no real savings. How can this happen?

In a competitive bid situation, when selecting a winner, it is important to make sure the savings promised by the MSP are realistic and immediately achievable. The scenario presented here describes an all-too-common situation in which a bid looks attractive on paper but real-world savings are not achieved.

Situations like this can be avoided by watching for two things:

1. Pricing expectations must be based on more than just historical values.

While using historical rates for existing contracts can be helpful as a guideline, it is important to base pricing expectations on more current market data. For example, consider using salary surveys relevant to your region to build more accurate, market-based values. Look for MSPs that follow similar processes for establishing their own pricing schedules, which means their bids are guided by the marketplace and are realistic, rather than just manufactured to meet targets in the RFP. And consider market dynamics; were the previous rates established during a downturn in the economy? Savings given that scenario may be illusory with the rebounding economy, which is why a mechanism for instant, market-based rates is generally a better alternative.

2. The promised rate must be immediate.

It is important to make sure that the rates promised in the RFP are implemented at the start of the contract and that existing contracts are not grandfathered in at already-existing rates.

And after the first year (or some other defined period) at the low rate used to get the contract, the MSP may attempt to "refresh" the rate upward back to previous levels. Under this arrangement, the client may never see the savings promised.

As in the case study, the winning supplier convinced the client that the new rate should apply only to the new hires. At the one year mark, the contract allowed the supplier to "adjust" the rates based on the market. The market had magically changed and was "a lot tighter"\, which meant the rates had to go back up to what the client was originally paying. Had the client chosen MSP 1, he would have received actual savings. Instead, he paid the same rate throughout the entire contract. The ideal MSP finds savings through a fluid, informed process that uses market-based data and superior supplier relationships to allow greater rate negotiation. Don't be lured by the appeal of paper-based savings only. They are empty promises.